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Is This Nintendo's Next Move?

Sony's PS Vita TV provides a template for what Nintendo might do next.

It's becoming increasingly difficult to disagree with the assertion that Nintendo's (NASDAQOTH:NTDOY)(NASDAQOTH:NTDOY)(NASDAQOTH:NTDOY) Wii U console is a failure. The system's sales have become a recurring punch line, and there is little reason to believe that a price drop and Zelda bundle will provide the type of momentum the console needs to become successful.

There exists a widely-held belief among consumers that the Wii U is simply an add-on for the 2006 Wii hardware that Nintendo has been incapable of counteracting. Short of dropping the system's expensive Gamepad controller and relaunching at a much lower price ($149 or $199), there doesn't look to be much that Nintendo can do to create a thriving ecosystem on the device.

Third party publishers have already been spooked by the system's abysmal sales and lagging online infrastructure. With Sony's (NYSE:SNE)(NYSE:SNE)(NYSE:SNE) PlayStation 4 and Microsoft's (NASDAQ:MSFT)(NASDAQ:MSFT)(NASDAQ:MSFT) Xbox One looming on the horizon, the situation looks dire for the Wii U. What will Nintendo do to ensure that its next foray into the console business does not meet the same fate?

Third party exodusNintendo is in a rough spot when it comes to planning its next gaming hardware. Given the substandard sales for major series on the Wii U, third parties will be cautious about devoting resources to any future Nintendo consoles. Even the highly successful Wii console was dominated by Nintendo's own publishing entries, but major publishers managed to find varying degrees of success.

The Wii U has been a graveyard by comparison. With that in mind, Nintendo will have to rely more on its first party output. Unfortunately, its transition into HD development has been anything but smooth,and it has not demonstrated that Nintendo is capable of supporting two concurrent platforms. The company's decision to unify its handheld and console divisionsindicates that it may pursue some type of hybrid in an attempt to stay relevant in both spaces.

To get a sense of one of the avenues Nintendo could pursue, take a look at Sony's recently unveiled PS Vita TV platform. The device plays compatible software from Sony's struggling Vita handheld but can also download games from the PSP and PSOne, combining to create a launch lineup of over 1,300 games.

It will also be able to stream PlayStation 3 games when Sony's Gaikai service launches in 2014and will be able to remotely play almost any game streamed from the upcoming PlayStation 4. Given that Nintendo's next console is likely to garner even less third party support than the Wii U, it seems likely that the company will have to rely on the strength of its back catalogue. Luckily for Nintendo, it has the strongest back-looking portfolio in gaming.

Growing painsNintendo's documented struggles in adapting to HD development and profit oriented business means that the company is unlikely to pursue high performance hardware. Still, in two years time, it could feasibly release a handheld with hardware slightly more power than the Wii U. In turn, it could release a PS Vita TV-like box for the home that would feature the same, or slightly more powerful, tech.

In doing so, Nintendo could continue to compete in both spaces, while broadening the addressable market for its software releases and building a device ecosystem that would be comparable to what Sony is doing. Nintendo does not have Sony's content streaming infrastructure, but it has already invested in streaming technologies with the Wii U, so connectivity and content sharing are safe bets for its next devices.

Not the only oneIt's worth noting that Microsoft's Xbox One could face a Wii U-esque problem after it launches this November. While the device is all but guaranteed to receive solid third party support throughout its lifecycle, there are certain comparisons to be drawn between the Kinect 2.0 and the Wii U's Gamepad. Both input devices account for a substantial portion of their respective build costsand each device was intended to provide the features that would define the coming console cycle.

Now, in light of market realities, both the new Kinect and the Gamepad are being de-emphasized. Microsoft and Nintendo would both be in better positions to compete against the PlayStation 4 if they launched SKUs of their respective consoles without the gimmicks.

The future is in the pastIf Nintendo does not undertake drastic measures to resuscitate the Wii U, it's going to find itself limping into the next round of console hardware. Third parties have learned their lesson, and Nintendo is not equipped to sustain two sets of hardware in the age of HD development. Accordingly, the company's best chance may be to replicate what we're seeing from Sony with the PS Vita TV.